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The near-term outlook of the global economy is being shaped by trade-related policies of major economies amid slowing pace of disinflation and these policies could stoke inflation, engender tighter financial conditions, and heighten market turbulence, Reserve Bank of India (RBI) officials said in the February edition of RBI Bulletin released on Wednesday.
“A strong dollar, driven by U.S. economic resilience and trade policy pivots, could exacerbate capital outflows from emerging economies, push risk premiums higher, and intensify external vulnerabilities,” they said in the article ‘State of the Economy’.
The ‘last mile’ of disinflation may become more challenging in such an environment, potentially requiring central banks to recalibrate policies, they observed.
Stating that financial markets remain on edge on the slowing pace of disinflation and the potential impact of tariffs, the officials said emerging market economies (EMEs) are witnessing selling pressures from foreign portfolio investors (FPIs) and currency depreciation engendered by a strong U.S. dollar.
However in India, high frequency indicators point towards a sequential pick-up in momentum of economic activity during H2:2024-25, which is likely to sustain moving forward, they pointed out
“The Union Budget 2025-26 prudently balances fiscal consolidation and growth objectives by continued focus on capex alongside measures to boost household incomes and consumption. Retail inflation moderated to a five-month low in January, mainly due to a sharp decline in vegetable prices,” they stated.
In India, economic activity momentum is poised to be sustained, strong rural demand is expected to receive a further fillip from the robust performance of the agriculture sector, they emphasised.
“Urban demand is also poised for a recovery, tracking decline in inflation as well as a boost to disposable incomes from the sizeable income tax relief announced in the Union Budget 2025-26,” they said.
“The Budget measures to fuel four engines of growth – agriculture, MSMEs, investment and exports – are expected to boost medium-term growth prospects of the Indian economy,” they said. “The Union Budget prudently balances fiscal consolidation and growth objectives by continued focus on capex alongside measures to support consumption while providing a clear roadmap for debt consolidation,” they added.
Emphasising that domestic demand is also expected to benefit from the repo rate cut by the MPC in its meeting on February 7, they said robust kharif production and better rabi sowing, coupled with higher reservoir levels and seasonal winter correction in vegetable prices, augur well for food inflation going forward.
”While core inflation remains muted, uncertainty in global financial markets, volatility in energy prices and adverse weather events present upside risks to the inflation trajectory,” they said.
Published – February 19, 2025 11:40 pm IST
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Trade-related policies to stroke inflation, heighten market turbulence: RBI Bulletin
